In the past, the biggest headache for the Kenyan government has been regulating the informal sector which is very vast and contributes between 30% and 40% of Gross Domestic Product (GDP) to the country’s economy.
In Kenya, SMEs are leading in the creation of employment opportunities at a little over 75%. However, despite being very vibrant, the Kenya Revenue Authority (KRA) is yet to streamline tax administration in the informal sector. Today, there are about 7.41 million MSMEs in Kenya, only 1.56 million are licensed whereas 5.85 million are unlicensed.
The struggle to tap revenue from the volatile and ever-growing sector has been great. The government took the first shot at trying to streamline tax in the sector back in 2007 by introducing Turn Over Tax (ToT).
KRA recently re-introduced ToT in a bid to ensure that the informal sector is included in the tax bracket. ToT was introduced by the Finance Bill of 2019.
Turnover Tax (TOT) is payable by any resident person whose turnover from business does not exceed or is not expected to exceed Ksh. 5,000,000 during any year of income. ToT will be payable from 1st January 2020 at a rate of 3% on the gross sales/turnover.
TOT, however, does not apply to:
i. Persons registered for VAT
ii. Persons with business income of Kshs 5,000,000 and above,
iii. Employment Income,
iv. Rental Income,
v. Limited Liability Companies,
vi. Management and Professional Services among other
Speaking during the Enterprise Development Programme knowledge session held at the Strathmore University Business School, Ephraim Munene from KRA said that, the tax was introduced to ensure equity and fairness by spreading the responsibility for developing the country to all citizens.
Mr. Munene highlighted the ease of expansion as one of the major benefits for businesses. “If you have prospects of growing your business in the future, then you need to start complying with taxation policies as soon as possible,” he said. He further added that ToT would simplify the cost of doing business for SMEs by reducing the number of employees needed in computing taxation data.
Learn more about our Enterprise Development Programme here.